Why Trump's PAB proposal sounds familiar

WASHINGTON -- President Trump’s proposal to expand the use of private activity bonds for public purpose infrastructure projects looks a lot like a proposal made more than three years ago by President Obama.

Trump detailed his proposal in the 53-page infrastructure plan he sent members of Congress on Monday.

The plan calls for $6 billion to go toward expanding and using PABs as a way to leverage financing for public-purpose infrastructure projects. The $6 billion would represent lost federal revenues, so it would allow for many more PABs to be issued for these projects.

Trump’s PAB proposal is part of a major effort by the administration to place more funding responsibility on the private sector and on state and local governments rather than the federal government, according to the infrastructure plan.

The plan would remove state volume caps, and the $15 billion transportation volume cap, for tax-exempt PABs used for public infrastructure projects.

The alternative minimum tax would also be removed for these enhanced PABs. Historically the AMT has led to higher interest rates on many PABs, making them more costly for state and local governments to issue.

Public-purpose infrastructure projects would have to be owned by state or local governments, with some exceptions. Projects could be owned by private parties but only under arrangements in which the rates charged for services or the use of the projects are subject to state or local regulatory or contractual control and approval. Also the projects would have to be available for general public use or to provide services to the general public.

Kent Hiteshew, former director of the Treasury Department's Office of State and Local Finance

These bonds appear to be very similar to the tax-exempt qualified public infrastructure bonds (QPIBs) that President Obama announced as part of the Build America Investment Initiative he launched in mid-January 2015.

QPIBs, which the Obama administration detailed in its budget requests for both fiscal years 2016 and 2017, would be like certain types of PABs but with eased tax law restrictions that could be more easily used in conjunction with financing for public-private partnership (P3) arrangements for infrastructure projects.

“The Trump proposal to broaden the eligibility and flexibility of PABs builds upon the prior Administration's efforts to level the playing field between public and private sector procurement and, if enacted, would encourage greater private capital investment in America's infrastructure,” said Kent Hiteshew, a former Treasury Department official who helped develop the QPIB proposal.

“Having said that, their proposed reprogramming of $200 billion of existing federal funds is woefully inadequate to produce the $1.5 trillion of sorely needed infrastructure investment that this proposal purports to create,” said Hiteshew, now a strategic advisor at EY.

Similar to Trump’s proposal for enhanced PABs, the two core eligibility requirements for QPIBs were that the infrastructure projects to be financed be governmentally owned and publicly used.

But Trump's plan goes further by saying projects can be owned by private parties but only under arrangements in which the rates charged for services or the use of the projects are subject to state or local regulatory or contractual control and approval.

Also similar to the Trump PAB proposal -- neither volume caps nor the alternative minimum tax would apply to QPIBs.

Trump’s proposal appears to include a few more projects that could be financed with these enhanced PABs, such as hydroelectric power generating facilities, flood control and stormwater facilities, and environmental remediation costs on Brownfield and Superfund sites.

Additionally, Trump’s proposal calls for modifying the so-called change-of-use tax rules to more easily preserve the tax-exempt status of governmental bonds when the bond-financed project is either used, or purchased, by one or more private parties. It would also provide change-of-use cures for private leasing of infrastructure projects to ensure preservation of the tax exemption of the bonds.

But these change-of-use modifications can be made by the Treasury Department and Internal Revenue Service and would not require legislation, sources said.

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